SBP Santander Bancorp (Holding CO)

 

 

UNITED STATES OF AMERICA SECURITIES AND EXCHANGE COMMISSION

Washington, D.C., 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period ended March 31, 2009

Commission File: 001-15849

SANTANDER BANCORP

(Exact name of Corporation as specified in its charter)

Commonwealth of Puerto Rico		66-0573723
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
207 Ponce de León Avenue, Hato Rey, Puerto Rico		00917
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code:
(787) 777-4100

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    þ      No    o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes    o      No   þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes    o      No   þ

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock as of the last practicable date.

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

Title of each class		Outstanding as of March 31, 2009
Common Stock, $2.50 par value		46,639,104

 

 

SANTANDER BANCORP

CONTENTS

		Page No.
Part I: Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets			1
Condensed Consolidated Statements of Operations			2
Condensed Consolidated Statements of Changes in Stockholders’ Equity			3
Condensed Consolidated Statements of Comprehensive Income (Loss)			4
Condensed Consolidated Statements of Cash Flows			5
Notes to Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			41
Item 3. Quantitative and Qualitative Disclosures About Market Risk			64
Item 4. Controls and Procedures			75
Part II: Other Information
Item 1. Legal Proceedings			76
Item 1A. Risk Factors			76
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			76
Item 3. Defaults Upon Senior Securities			76
Item 4. Submission of Matters to a Vote of Security Holders			76
Item 5. Other Information			76
Item 6. Exhibits			77
Signatures			79
EX-12
EX-31.1
EX-31.2
EX-32.1

Forward-Looking Statements . When used in this Form 10-Q or future filings by Santander BanCorp (the “Corporation”) with the Securities and Exchange Commission, in the Corporation’s press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the word or phrases “would be”, “will allow”, “intends to”, “will likely result”, “are expected to”, “will continue”, “is anticipated”, “estimate”, “project”, “believe”, or similar expressions are intended to identify “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

          The future results of the Corporation could be affected by subsequent events and could differ materially from those expressed in forward-looking statements. If future events and actual performance differ from the Corporation’s assumptions, the actual results could vary significantly from the performance projected in the forward-looking statements.

          The Corporation wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including regional and national conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investment activities, competitive and regulatory factors and legislative changes, could affect the Corporation’s financial performance and could cause the Corporation’s actual results for future periods to differ materially from those anticipated or projected. The Corporation does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

PART I — ITEM 1

FINANCIAL STATEMENTS (UNAUDITED)

SANTANDER BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AS OF MARCH 31, 2009 AND DECEMBER 31, 2008
(Dollars in thousands, except share data)

		March 31,				December 31,
		2009				2008
ASSETS
Cash and Cash Equivalents:
Cash and due from banks		$	405,012			$	217,311
Interest-bearing deposits			50,964				976
Federal funds sold and securities purchased under agreements to resell			152,024				64,871
Total cash and cash equivalents			608,000				283,158
Interest-Bearing Deposits			8,557				7,394
Trading Securities, at fair value			47,073				64,719
Investment Securities Available for Sale, at fair value:
Securities pledged that can be repledged			—				408,650
Other investment securities available for sale			323,640				393,462
Total investment securities available for sale			323,640				802,112
Other Investment Securities, at amortized cost			51,957				61,632
Loans Held for Sale, net			30,498				38,459
Loans, net			5,627,085				5,929,499
Accrued Interest Receivable			41,901				45,953
Premises and Equipment, net			18,202				19,368
Real Estate Held for Sale			8,075				8,075
Goodwill			121,482				121,482
Intangible Assets			29,719				29,842
Other Assets			436,791				485,883
		$	7,352,980			$	7,897,576
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non interest-bearing		$	698,498			$	692,963
Interest-bearing, including $82.5 million and $101.4 million at fair value in 2009 and 2008, respectively			4,401,183				4,321,939
Total deposits			5,099,681				5,014,902
Federal Funds Purchased and Other Borrowings			890				2,040
Securities Sold Under Agreements to Repurchase			—				375,000
Commercial Paper Issued			34,084				50,985
Federal Home Loan Bank Advances			970,000				1,185,000
Term Notes			20,117				19,967
Subordinated Capital Notes, including $120.9 million and $118.3 million at fair value in 2009 and 2008, respectively			309,063				306,392
Accrued Interest Payable			51,745				45,419
Other Liabilities			321,935				346,235
Total liabilities			6,807,515				7,345,940
Contingencies and Commitments (Notes 9, 10, 12, 13 and 16)
STOCKHOLDERS’ EQUITY:
Series A Preferred stock, $25 par value; 10,000,000 shares authorized, none issued and outstanding			—				—
Common stock, $2.50 par value; 200,000,000 shares authorized, 50,650,364 shares issued; 46,639,104 shares outstanding			126,626				126,626
Capital paid in excess of par value			317,624				317,141
Treasury stock at cost, 4,011,260 shares			(67,552	)			(67,552	)
Accumulated other comprehensive loss, net of taxes			(29,185	)			(22,563	)
Retained earnings:
Reserve fund			139,250				139,250
Undivided profits			58,702				58,734
Total stockholders’ equity			545,465				551,636
		$	7,352,980			$	7,897,576

The accompanying notes are an integral part of these condensed consolidated financial statements

SANTANDER BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Dollars in thousands, except per share data)

		For the three months ended
		March 31,				March 31,
		2009				2008
Interest Income:
Loans		$	119,527			$	143,670
Investment securities			8,944				14,120
Interest-bearing deposits			189				451
Federal funds sold and securities purchased under agreements to resell			15				788
Total interest income			128,675				159,029
Interest Expense:
Deposits			28,037				39,206
Securities sold under agreements to repurchase and other borrowings			12,273				31,559
Subordinated capital notes			3,972				3,665
Total interest expense			44,282				74,430
Net interest income			84,393				84,599
Provision for Loan Losses			41,100				39,575
Net interest income after provision for loan losses			43,293				45,024
Other Income (Loss):
Bank service charges, fees and other			10,358				12,425
Broker-dealer, asset management and insurance fees			12,965				21,987
Gain on sale of securities			9,251				2,874
Gain on sale of loans			2,246				1,438
Other (loss) income			(9,452	)			13,635
Total other income			25,368				52,359
Other Operating Expenses:
Salaries and employee benefits			26,855				29,987
Occupancy costs			6,257				6,416
Equipment expenses			1,083				1,193
EDP servicing, amortization and technical assistance			10,254				10,178
Communication expenses			2,447				2,535
Business promotion			767				1,965
Other taxes			3,357				3,406
Other operating expenses			18,357				15,764
Total other operating expenses			69,377				71,444
(Loss) income before provision for income tax			(716	)			25,939
(Benefit) Provision for Income Tax			(685	)			8,217
Net (Loss) Income Available to Common Shareholders		$	(31	)		$	17,722
Basic and Diluted Earnings per Common Share		$	0.00			$	0.38

The accompanying notes are an integral part of these condensed consolidated financial statements

SANTANDER BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND YEAR ENDED DECEMBER 31, 2008
(Dollars in thousands)

		For the three months ended				Year ended
		March 31, 2009				December 31, 2008
Common Stock:
Balance at beginning of year		$	126,626			$	126,626
Balance at end of period			126,626				126,626
Capital Paid in Excess of Par Value:
Balance at beginning of year			317,141				308,373
Capital contribution			483				9,710
Payments to ultimate parent for long-term incentive plan			—				(942	)
Balance at end of period			317,624				317,141
Treasury Stock at cost:
Balance at beginning of year			(67,552	)			(67,552	)
Balance at end of period			(67,552	)			(67,552	)
Accumulated Other Comprehensive Loss, net of tax:
Balance at beginning of year			(22,563	)			(24,478	)
Unrealized net (loss) gain on investment securities available for sale, net of tax			(4,672	)			13,449
Unrealized net gain on cash flow hedges, net of tax			—				1,237
Minimum pension liability, net of tax			(1,950	)			(12,771	)
Balance at end of the period			(29,185	)			(22,563	)
Reserve Fund:
Balance at beginning of year			139,250				139,250
Balance at end of the period			139,250				139,250
Undivided Profits:
Balance at beginning of year			58,734				54,317
Net (loss) income			(31	)			10,531
Deferred tax benefit amortization			(1	)			(4	)
Common stock cash dividends			—				(9,329	)
Cummulative effect of the adoption of SFAS 159			—				3,219
Balance at end of the period			58,702				58,734
Total stockholders’ equity		$	545,465			$	551,636

The accompanying notes are an integral part of these condensed consolidated financial statements

SANTANDER BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Dollars in thousands)

		For the three months ended
		March 31,				March 31,
		2009				2008
Comprehensive (loss) income
Net (loss) income		$	(31	)		$	17,722
Other comprehensive (loss) income, net of tax:
Unrealized holding (losses) gains on investment securities available for sale, net of tax			(60	)			9,975
Reclassification adjustment for losses on investment securities available for sale included in net (loss) income, net of tax			(4,612	)			(331	)
Unrealized net (loss) gain on investment securities available for sale, net of tax			(4,672	)			9,644
Unrealized net loss on cash flow hedges, net of tax			—				(1,117	)
Minimum pension liability, net of tax			(1,950	)			—
Total other comprehensive (loss) income, net of tax			(6,622	)			8,527
Comprehensive (loss) income		$	(6,653	)		$	26,249

The accompanying notes are an integral part of these condensed consolidated financial statements

SANTANDER BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Dollars in thousands)

		For the three months ended
		March 31,				March 31,
		2009				2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income		$	(31	)		$	17,722
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Depreciation and amortization			3,216				4,006
Deferred tax benefit			(4,603	)			(1,582	)
Provision for loan losses			41,100				39,575
Gain on sale of securities available for sale			(9,251	)			(2,874	)
Gain on sale of loans			(2,246	)			(1,438	)
Loss (gain) on derivatives			3,928				(3,769	)
Gain on trading securities			(403	)			(1,582	)
Valuation loss on loans held for sale			—				1,638
Net premiun amortization (discount accretion) on securities			309				(1,257	)
Net premium amortization on loans			144				101
Accretion of debt discount			158				—
Share based compensation sponsored by the ultimate parent			483				5,511
Purchases and originations of loans held for sale			(56,598	)			(107,774	)
Proceeds from sales of loans			111,834				36,235
Repayments of loans held for sale			734				4,788
Proceeds from sales of trading securities			226,772				820,165
Purchases of trading securities			(174,684	)			(811,888	)
Decrease in accrued interest receivable			4,052				12,617
Decrease (increase) in other assets			27,636				(28,983	)
Increase (decrease) in accrued interest payable			6,326				(18,611	)
(Decrease) increase in other liabilities			(2,033	)			2,377
Total adjustments			176,874				(52,745	)
Net cash provided by (used in) operating activities			176,843				(35,023	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in interest-bearing deposits			(1,163	)			(3,695	)
Proceeds from sales of investment securities available for sale			450,258				128,158
Proceeds from maturities of investment securities available for sale			137,000				5,159,679
Purchases of investment securities available for sale			(129,339	)			(5,094,991	)
Proceeds from maturities of other investment securities			11,700				16,875
Purchases of other investments			(2,025	)			(22,500	)
Repayment of securities and securities called			23,850				20,308
Payments on derivative transactions			—				(929	)
Net decrease in loans			181,350				20,178
Purchases of premises and equipment			(360	)			(2,693	)
Net cash provided by investing activities			671,271				220,390

(Continued)

The accompanying notes are an integral part of these condensed consolidated financial statements

SANTANDER BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
(Dollars in thousands)

		For the three months ended
		March 31,				March 31,
		2009				2008
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits			84,779				388,744
Net decrease in federal funds purchased and other borrowings			(216,150	)			(529,780	)
Net decrease in securities sold under agreements to repurchase			(375,000	)			(60,597	)
Net (decrease) increase in commercial paper issued			(16,901	)			298,697
Net increase in term notes			—				147
Net increase in subordinated capital notes			—				9
Dividends paid			—				(7,462	)
Net cash (used in) provided by financing activities			(523,272	)			89,758
NET CHANGE IN CASH AND CASH EQUIVALENTS			324,842				275,125
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR			283,158				201,697
CASH AND CASH EQUIVALENTS, END OF YEAR		$	608,000			$	476,822

Concluded

     Supplemental Disclosures of Cash Flow Information:

		March 31,				March 31,
		2009				2008
		(Dollars in thousands)
Cash paid during the year for:
Interest		$	37,457			$	93,874
Income taxes		$	4,268			$	40
Noncash transactions:
Exercised options recognized as capital contribution		$	—			$	4,616
Minimum pension liability		$	1,950			$	—
Loan securitization		$	34,057			$	—

The accompanying notes are an integral part of these condensed consolidated financial statements

SANTANDER BANCORP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2009 AND 2008

1. Summary of Significant Accounting Policies:

          The accounting and reporting policies of Santander BanCorp (the “Corporation”), a 91% owned subsidiary of Banco Santander, S.A. (“Santander Group”) conform with accounting principles generally accepted in the United States of America (hereinafter referred to as “generally accepted accounting principles” or “GAAP”) and with general practices within the financial services industry. The unaudited quarterly condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. The results of the operations and cash flows for the three month periods ended March 31, 2009 and 2008 are not necessarily indicative of the results to be expected for the full year.

          These statements should be read in conjunction with the consolidated financial statements included in the Corporation’s Form 10-K for the year ended December 31, 2008. The accounting policies used in preparing these condensed consolidated financial statements are substantially the same as those described in Note 1 to the 2008 consolidated financial statements in the Corporation’s Form 10-K.

Following is a summary of the Corporation’s most significant policies:

Nature of Operations and Use of Estimates

          Santander BanCorp is a financial holding company offering a full range of financial services (including mortgage banking) through its wholly owned banking subsidiary Banco Santander Puerto Rico and subsidiary (the “Bank”). The Corporation also engages in broker-dealer, asset management, consumer finance, international banking, insurance agency services through its subsidiaries, Santander Securities Corporation, Santander Asset Management Corporation, Santander Financial Services, Inc. (“Island Finance”), Santander International Bank, Santander Insurance Agency and Island Insurance Corporation (currently inactive), respectively.

          Santander BanCorp is subject to the Federal Bank Holding Company Act and to the regulations, supervision, and examination of the Federal Reserve Board.

          In preparing the condensed consolidated financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, impairment of goodwill and other intangibles, income taxes, and the valuation of foreclosed real estate, deferred tax assets and financial instruments.

Principles of Consolidation

          The condensed consolidated financial statements include the accounts of the Corporation, the Bank and the Bank’s wholly owned subsidiary, Santander International Bank; Santander Securities Corporation and its wholly owned subsidiary, Santander Asset Management Corporation; Santander Financial Services, Inc., Santander Insurance Agency and Island Insurance Corporation. All significant intercompany balances and transactions have been eliminated in consolidation.

Securities Purchased/Sold under Agreements to Resell/Repurchase

          Repurchase and resell agreements are treated as collateralized financing transactions and are carried at the amounts at which the assets will be reacquired or resold at the contractual maturity. The settlement of these agreements prior to maturity may be subject to early termination penalties.

          The counterparties to securities purchased under resell agreements maintain effective control over such securities and accordingly, those securities are not reflected in the Corporation’s consolidated balance sheets. The Corporation monitors the market value of the underlying securities as compared to the related receivable, including accrued interest, and requests additional collateral where deemed appropriate.

          The Corporation maintains effective control over assets sold under agreements to repurchase; accordingly, such securities continue to be carried on the consolidated balance sheets.

Investment Securities

          Investment securities are classified in four categories and accounted for as follows:

	•		Debt securities that the Corporation has the intent and ability to hold to maturity are classified as securities held to maturity and reported at cost adjusted for premium amortization and discount accretion. The Corporation may not sell or transfer held-to-maturity securities without calling into question its intent to hold securities to maturity, unless a nonrecurring or unusual event that could not have been reasonably anticipated has occurred.
	•		Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value with unrealized gains and losses included in the consolidated statements of operations as part of other income. Financial instruments including, to a limited extent, derivatives, such as option contracts, are used by the Corporation in dealing and other trading activities and are carried at fair value. Interest revenue and expense arising from trading instruments are included in the consolidated statements of operations as part of net interest income.
	•		Debt and equity securities not classified as either securities held to maturity or trading securities, and which have a readily available fair value, are classified as securities available for sale and reported at fair value, with unrealized gains and losses reported, net of tax, in accumulated other comprehensive income (loss). The specific identification method is used to determine realized gains and losses on sales of securities available for sale, which are included in gain (loss) on sale of investment securities in the consolidated statements of operations.
	•		Investments in debt, equity or other securities, that do not have readily determinable fair values, are classified as other investment securities in the consolidated balance sheets. These securities are stated at cost. Stock that is owned by the Corporation to comply with regulatory requirements, such as Federal Home Loan Bank (FHLB) stock, is included in this category.

          The amortization of premiums is deducted and the accretion of discounts is added to net interest income based on a method which approximates the interest method, over the outstanding life of the related securities. The cost of securities sold is determined by specific identification. For securities available for sale, held to maturity and other investment securities, the Corporation reports separately in the consolidated statements of operations, net realized gains or losses on sales of investment securities and unrealized loss valuation adjustments considered other than temporary, if any.

Derivative Financial Instruments

          The Corporation uses derivative financial instruments mostly as hedges of interest rate risk, changes in fair value of assets and liabilities and to secure future cash flows.

          All of the Corporation’s derivative instruments are recognized as assets or liabilities at fair value. If certain conditions are met, the derivative may qualify for hedge accounting treatment and be designated as one of the following types of hedges: (a) hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment (“fair value hedge”); (b) a hedge of the exposure to variability of cash flows of a recognized asset, liability or forecasted transaction (“cash flow hedge”) or (c) a hedge of foreign currency exposure (“foreign currency hedge”).

          Prior to the adoption of Statement of Financial Accounting Standard (“SFAS” ) No. 159, “Fair Value Option for Financial Assets and Financial Liabilities- including an amendment of FASB Statements No. 115" , in the case of a qualifying fair value hedge, changes in the value of the derivative instruments that have been highly effective were recognized in current period consolidated statements of operations along with the change in value of the designated hedged item attributable to the risk being hedged. If the hedge relationship was terminated, hedge accounting was discontinued and any balance related to the derivative was recognized in current operations, and the fair value adjustment to the hedged item continued to be reported as part of the basis of the item and was amortized to earnings as a yield adjustment. The Corporation hedges certain callable brokered certificates of deposits and subordinated capital notes by using interest rate swaps. Prior to the adoption of SFAS 159 as of January 1, 2008, these swaps were designated for the hedge accounting treatment under SFAS 133, “ Accounting for Derivatives Instruments and Hedging Activities” as amended and interpreted (“SFAS 133”). These financial instruments were accounted for as fair value hedges, with changes in the fair value of both the derivative and the hedged item included in other income and the interest included in net interest income in the consolidated statements of operations. In connection with the adoption of SFAS

159 the Corporation carries certain callable brokered certificates of deposits and subordinated capital notes at fair value with changes in fair value included in other income in the consolidated statements of operations. The cost of funding of the Corporation’s borrowings, as well as derivatives, continues to be included in interest expense and income, as applicable, in the consolidated statements of operations. See Note 18 to the consolidated financial statements for more information.

          In the case of a qualifying cash flow hedge, changes in the value of the derivative instruments that have been highly effective are recognized in other comprehensive income, until such time as those earnings are affected by the variability of the cash flows of the underlying hedged item. If the hedge relationship is terminated, the net derivative gain or loss related to the discontinued cash flow hedge should continue to be reported in accumulated other comprehensive income (loss) and would be reclassified into earnings when the cash flows that were hedged occur, or when the forecasted transaction affects earnings or is no longer expected to occur. In either a fair value hedge or a cash flow hedge, net earnings may be impacted to the extent the changes in the value of the derivative instruments do not perfectly offset changes in the value of the hedged items. If the derivative is not designated as a hedging instrument, the changes in fair value of the derivative are recorded in consolidated statements of operations.

          Certain contracts contain embedded derivatives. When the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, it is bifurcated, carried at fair value, and designated as a trading or non-hedging derivative instrument.

Loans Held for Sale

          Loans held for sale are recorded at the lower of cost or market computed on the aggregate portfolio basis. The amount, by which cost exceeds market value, if any, is accounted for as a valuation allowance with changes included in the determination of results of operations for the period in which the change occurs. The amount of loan origination cost and fees are deferred at origination of the loans and recognized as part of the gain and loss on sale of the loans in the consolidated statement of operations as part of other income.

Loans

          Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for the allowance for loan losses, unearned finance charges and any deferred fees or costs on originated loans.

          Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and amortized using methods that approximate the interest method over the term of the loans as an adjustment to interest yield. Discounts and premiums on purchased loans are amortized to results of operations over the expected lives of the loans using a method that approximates the interest method.

          The accrual of interest on commercial loans, construction loans, lease financing and closed-end consumer loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due, but in no event is it recognized after 90 days in arrears on payments of principal or interest. Interest on mortgage loans is not recognized after four months in arrears on payments of principal or interest. Income is generally recognized on open-end (revolving credit) consumer loans until the loans are charged off. When interest accrual is discontinued, unpaid interest is reversed on all closed-end portfolios. Interest income is subsequently recognized only to the extent that it is collected. The non accrual status is discontinued when loans are made current by the borrower.

          The Corporation leases vehicles and equipment to individual and corporate customers. The finance method of accounting is used to recognize revenue on lease contracts that meet the criteria specified in (“SFAS”) No. 13, “ Accounting for Leases ,” as amended. Aggregate rentals due over the term of the leases less unearned income are included in lease receivable, which is part of “Loans, net” in the consolidated balance sheets. Unearned income is amortized to results of operations over the lease term so as to yield a constant rate of return on the principal amounts outstanding. Lease origination fees and costs are deferred and amortized over the average life of the portfolio as an adjustment to yield.

Off-Balance Sheet Instruments

          In the ordinary course of business, the Corporation enters into off-balance sheet instruments consisting of commitments to extend credit, stand by letters of credit and financial guarantees. Such financial instruments are recorded in the consolidated financial statements when they are funded or when related fees are incurred or received. The Corporation periodically evaluates the credit risks inherent in these commitments, and establishes loss allowances for such risks if and when these are deemed necessary.

          The Corporation recognized as liabilities the fair value of the obligations undertaken in issuing the guarantees under the standby letters of credit issued or modified after December 31, 2002, net of the related amortization at inception. The fair value approximates the unamortized fees received from the customers for issuing the standby letters of credit. The fees are deferred and recognized on a straight-line basis over the commitment period. Standby letters of credit outstanding at March 31, 2009 had terms ranging from one month to five years.

          Fees received for providing loan commitments and letters of credit that result in loans are typically deferred and amortized to interest income over the life of the related loan, beginning with the initial borrowing. Fees on commitments and letters of credit are amortized to other income as banking fees and commissions over the commitment period when funding is not expected.

Allowance for Loan Losses

          The allowance for loan losses is a current estimate of the losses inherent in the present portfolio based on management’s ongoing quarterly evaluations of the loan portfolio. Estimates of losses inherent in the loan portfolio involve the exercise of judgment and the use of assumptions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance is increased by a provision for loan losses, which is charged to expense and reduced by charge-offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses. Because of uncertainties inherent in the estimation process, management’s estimate of credit losses in the loan portfolio and the related allowance may change in the near term.

          The Corporation follows a systematic methodology to establish and evaluate the adequacy of the allowance for loan losses. This methodology consists of several key elements.

          Larger commercial, construction loans and certain mortgage loans that exhibit potential or observed credit weaknesses are subject to individual review. Where appropriate, allowances are allocated to individual loans based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flow and legal options available to the Corporation.

          Included in the review of individual loans are those that are impaired as defined by GAAP. Any allowances for loans deemed impaired are measured based on the present value of expected future cash flows discounted at the loans’ effective interest rate or on the fair value of the underlying collateral if the loan is collateral dependent. Commercial business, commercial real estate, construction and mortgage loans exceeding a predetermined monetary threshold are individually evaluated for impairment. Other loans are evaluated in homogeneous groups and collectively evaluated for impairment. Loans that are recorded at fair value or at the lower of cost or fair value are not evaluated for impairment. Impaired loans for which the discounted cash flows, collateral value or fair value exceeds its carrying value do not require an allowance. The Corporation evaluates the collectivity of both principal and interest when assessing the need for loss accrual.

          Historical loss rates are applied to other commercial loans not subject to individual review. The loss rates are derived from historical loss trends.

          Homogeneous loans, such as consumer installment, credit card, residential mortgage and consumer finance are not individually risk graded. Allowances are established for each pool of loans based on the expected net charge-offs for one year. Loss rates are based on the average net charge-off history by loan category, market loss trends and other relevant economic factors.

          An unallocated allowance is maintained to recognize the imprecision in estimating and measuring losses when estimating the allowance for individual loans or pools of loans.

          Historical loss rates for commercial and consumer loans may also be adjusted for significant factors that, in management’s judgment, reflect the impact of any current condition on loss recognition. Factors which management considers in the analysis include the effect of the national and local economies, trends in the nature and volume of loans (delinquencies,

charge-offs, non-accrual and problem loans), changes in the internal lending policies and credit standards, collection practices, and examination results from bank regulatory agencies and the Corporation’s internal credit examiners.

          Allowances on individual loans and historical loss rates are reviewed quarterly and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection and charge-off experience.

Transfers and Servicing of Financial Assets and Extinguishments of Liabilities

          Transfers of financial assets are accounted for as sales, when control over the transferred assets is deemed to be surrendered: (1) the assets have been isolated from the Corporation, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. The Corporation recognizes the financial assets and servicing assets it controls and the liabilities it has incurred. At the same time, it ceases to recognize financial assets when control has been surrendered and liabilities when they are extinguished.

Goodwill and Intangible Assets

          The Corporation accounts for goodwill in accordance with SFAS No. 142, “ Goodwill and Other Intangible Assets .” The reporting units are tested for impairment annually to determine whether their carrying value exceeds their fair market value. Should this be the case, the value of goodwill or indefinite-lived intangibles may be impaired and written down. Goodwill and other indefinite lived intangible assets are also tested for impairment on an interim basis if an event occurs or circumstances change between annual tests that would more likely than not reduce the fair value of the reporting unit below its carrying amount. If there is a determination that the fair value of the goodwill or other identifiable intangible asset is less than the carrying value, an impairment loss is recognized in an amount equal to the difference. Impairment losses, if any, are reflected in operating expenses in the consolidated statement of operations.

          In accordance with SFAS No. 144 “ Accounting for the Impairment or Disposal of Long-Lived Assets ”, the Corporation reviews finite-lived intangible assets for impairment whenever an event occurs or circumstances changes which indicate that the carrying amount of such assets may not be fully recoverable. Determination of recoverability is based on the estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss is based on the fair value of the asset compared to its carrying value. If the fair value of the asset is determined to be less that the carrying value, an impairment loss is incurred in the amount equal to the difference. Impairment losses, if any, are reflected in operation expenses in the consolidated statements of operations.

          The Corporation uses judgment in assessing goodwill and intangible assets for impairment. Estimates of fair value are based on projections of revenues, operating costs and cash flows of each reporting unit considering historical and anticipated future results, general economic and market conditions as well as the impact of planned business or operational strategies. The valuations employ a combination of present value techniques to measure fair value and consider market factors. Generally, the Corporation engages third party specialists to assist with its valuations. Additionally, judgment is used in determining the useful lives of finite-lived intangible assets. Changes in judgments and projections could result in a significantly different estimate of the fair value of the reporting units and could result in an impairment of goodwill. Effective January 1, 2009, the Corporation has adopted SFAS 157 for fair value measurement of goodwill and intangible assets pursuant to FASB Staff Position (“FSP”) FAS 157-2 “ Effective Date of FASB Statement No. 157” issued in February 2008. The adoption of this statement for nonfinancial assets and nonfinancial liabilities did not have material impact on the Corporation’s consolidated financial statements and disclosures.

          As a result of the purchase price allocations from prior acquisitions and the Corporation’s decentralized structure, goodwill is included in multiple reporting units. Due to certain factors such as the highly competitive environment, cyclical nature of the business in some of the reporting units, general economic and market conditions as well as planned business or operational strategies, among others, the profitability of the Corporation’s individual reporting units may periodically suffer from downturns in these factors. These factors may have a relatively more pronounced impact on the individual reporting units as compared to the Corporation as a whole and might adversely affect the fair value of the reporting units. If material adverse conditions occur that impact the Corporation’s reporting units, the Corporation’s reporting units, and the related goodwill would need to be written down to an amount considered recoverable.

Mortgage-servicing Rights

          Mortgage-servicing rights (“MSRs”) represent the cost of acquiring the contractual rights to service loans for others. On a quarterly basis the Corporation evaluates its MSRs for impairment and charges any such impairment to current period

earnings. In order to evaluate its MSRs the Corporation stratifies the related mortgage loans on the basis of their risk characteristics which have been determined to be: type of loan (government-guaranteed, conventional, conforming and non-conforming), interest rates and maturities. Impairment of MSRs is determined by estimating the fair value of each stratum and comparing it to its carrying value. No impairment loss was recognized for the three months ended March 31, 2009 and 2008.

          MSRs are also subject to periodic amortization. The amortization of MSRs is based on the amount and timing of estimated cash flows to be recovered with respect to the MSRs over their expected lives. Amortization may be accelerated or decelerated to the extent that changes in interest rates or prepayment rates warrant.

Mortgage Banking

          Mortgage loan servicing includes collecting monthly mortgagor payments, forwarding payments and related accounting reports to investors, collecting escrow deposits for the payment of mortgagor property taxes and insurance, and paying taxes and insurance from escrow funds when due. No asset or liability is recorded by the Corporation for mortgages serviced, except for mortgage-servicing rights arising from the sale of mortgages, advances to investors and escrow advances.

          The Corporation recognizes as a separate asset the right to service mortgage loans for others whenever those servicing rights are acquired. The Corporation acquires MSRs by purchasing or originating loans and selling or securitizing those loans (with the servicing rights retained) and allocates the total cost of the mortgage loans sold to the MSRs (included in intangible assets in the accompanying condensed consolidated balance sheets) and the loans based on their relative fair values. Further, mortgage-servicing rights are assessed for impairment based on the fair value of those rights. MSRs are amortized over the estimated life of the related servicing income. Mortgage loan-servicing fees, which are based on a percentage of the principal balances of the mortgages serviced, are credited to income as mortgage payments are collected.

          Mortgage loans serviced for others are not included in the accompanying condensed consolidated balance sheets. At March 31, 2009 and December 31, 2008, the unpaid principal balances of mortgage loans serviced for others amounted to approximately $1,290,000,000 and $1,281,000,000, respectively. In connection with these mortgage-servicing activities, the Corporation administered escrow and other custodial funds which amounted to approximately $3,541,000 and $4,001,000 at March 31, 2009 and December 31, 2008, respectively.

Trust Services

          In connection with its trust activities, the Corporation administers and is custodian of assets amounting to approximately $153,000,000 and $200,000,000 at March 31, 2009 and December 31, 2008, respectively. Due to the nature of trust activities, these assets are not included in the Corporation’s consolidated balance sheets. Since December 31, 2006, when the Corporation sold to an unaffiliated third party the servicing rights for certain trust accounts, the Corporation’s Trust Division is focusing its efforts on transfer and paying agent and Individual Retirement Account (IRA) services.

Broker-dealer and Asset Management Commissions

          Commissions of the Corporation’s broker-dealer operations are composed of brokerage commission income and expenses recorded on a trade date basis and proprietary securities transactions recorded on a trade date basis. Investment banking revenues include gains, losses and fees net of syndicate expenses, arising from securities offerings in which the Corporation acts as an underwriter or agent. Investment banking management fees are recorded on offering date, sales concessions on trade date, and underwriting fees at the time the underwriting is completed and the income is reasonably determinable. Revenues from portfolio and other management and advisory fees include fees and advisory charges resulting from the asset management of certain funds and are recognized over the period when services are rendered.

Insurance Commissions

          The Corporation’s insurance agency operation earns commissions on the sale of insurance policies issued by unaffiliated insurance companies. Commission revenue is reported net of the provision for commission returns on insurance policy cancellations, which is based on management’s estimate of future insurance policy cancellations as a result of historical turnover rates by types of credit facilities subject to insurance.

Income Taxes

          The Corporation uses the asset and liability balance sheet method for the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Corporation’s financial statements or tax returns. Deferred income tax assets and liabilities are determined for differences between financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. The computation is based on enacted tax laws and rates applicable to periods in which the temporary differences are expected to be recovered or settled. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be realized.

          The Corporation accounts for uncertain tax positions in accordance with FASB Interpretation No. 48, “ Accounting for Uncertainty in Income Taxes ” (“FIN 48”). Accordingly, the Corporation reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Corporation recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.

Earnings Per Common Share

          Basic and diluted earnings per common share are computed by dividing net income available to common stockholders, by the weighted average number of common shares outstanding during the period. The Corporation’s average number of common shares outstanding, used in the computation of earnings per common share was 46,639,104 for each of the quarters ended March 31, 2009 and 2008. Basic and diluted earnings per common share are the same since no stock options or other potentially dilutive common shares were outstanding during the periods ended March 31, 2009 and 2008.

Recent Accounting Pronouncements that Affect the Corporation

          The adoption of these accounting pronouncements had the following impact on the Corporation’s condensed consolidated statements of income and financial condition:

	•		SFAS No. 157, “Fair Value Measurements.” In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. The Corporation adopted SFAS 157, as of January 1, 2008 for financial assets and liabilities. Fair value is defined under SFAS 157 as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In February 2008, the FASB issued a FASB Staff Position (FSP FAS 157-2) that partially delayed the effective date of SFAS 157 for one year for certain nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. FSP FAS 157-2 states that a measurement is recurring if it happens at least annually and defines nonfinancial assets and nonfinancial liabilities as all assets and liabilities other than those meeting the definition of a financial asset or financial liability in SFAS No. 159. Effective January 1, 2009, the Corporation adopted SFAS 157 for nonfinancial assets and liabilities eligible for deferral under FSP FAS 157-2. The adoption of this statement for nonfinancial assets and nonfinancial liabilities did not have material impact on the Corporation’s consolidated financial statements and disclosures. See Notes 12 and 18 for additional information.
	•		SFAS No. 159, “Fair Value Option for Financial Assets and Financial Liabilities- including an amendment of FASB Statements No. 115.” In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. In conjunction with the adoption of SFAS 157, the Corporation adopted SFAS 159, as of January 1, 2008. SFAS 159 provides an option for most financial assets and liabilities to be reported at fair value on an instrument-by-instrument basis with changes in fair value reported in earnings. The election is made at the initial adoption, at the acquisition of a financial asset, financial liability or a firm commitment and it may not be revoked. Under the SFAS 159 transition provisions, the Corporation has elected to report certain callable brokered certificates of deposits and subordinated notes at fair value with future changes in value reported in earnings. SFAS 159 provides an opportunity to mitigate volatility in reported earnings as well as reducing the burden associated with complex hedge accounting requirements. As a result of this adoption and election under the fair value option on January 1, 2008 , the Corporation reported an after-tax increase to beginning of year retained earnings of $3.2 million.
	•		SFAS No. 161 “Disclosure about Derivative Instruments and Hedging Activities, an amendment of FASB Statements No. 133.” In March 2008, the FASB issued SFAS No. 161, which requires the enhancement of the current disclosure framework in Statement 133. The Statement requires that objectives for using derivative instruments be disclosed in

			terms of underlying risk and accounting designation. This disclosure better conveys the purpose of derivative use in terms of the risks that the entity is intending to manage. Disclosing the fair values of derivative instruments and their gains and losses in a tabular format should provide a more complete picture of the location in an entity’s financial statements of both the derivative positions existing at period end and the effect of using derivatives during the reporting period. Disclosing information about credit-risk-related contingent features should provide information on the potential effect on an entity’s liquidity from using derivatives. Finally, this Statement requires cross-referencing within the footnotes, which should help users of financial statements locate important information about derivative instruments. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The adoption of this Statement did not have material impact on the Corporation’s consolidated financial statements and disclosures.
	•		Staff Position (FSP) FAS 142-3, “Determination of Useful Life of Intangible Assets"(“FSP FAS 142-3”). In April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, “Determination of Useful Life of Intangible Assets. This FASB Staff Position (FSP) amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets . The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141 (revised 2007), Business Combinations, and other U.S. generally accepted accounting principles (GAAP). An intangible asset may be acquired individually or with a group of other assets. This FSP applies regardless of the nature of the transaction that resulted in the recognition of the intangible asset, that is, whether acquired in a business combination or otherwise. In developing assumptions about renewal or extension used to determine the useful life of a recognized intangible asset, an entity shall consider its own historical experience in renewing or extending similar arrangements; however, these assumptions should be adjusted for the entity-specific factors in paragraph 11 of Statement 142. In the absence of that experience, an entity shall consider the assumptions that market participants would use about renewal or extension (consistent with the highest and best use of the asset by market participants), adjusted for the entity-specific factors in paragraph 11 of Statement 142. This FSP is for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The Corporation adopted FSP FAS 142-3 effective January 1, 2009. The adoption of this FSP did not have a material impact on the Corporation’s financial statements and disclosures.

          The Corporation is evaluating the impact that the following recently issued accounting pronouncements may have on its consolidated financial condition and results of operations.

	•		SFAS No. 162 “The Hierarchy of Generally Accepted Accounting Principles.” In May 2008, the FASB issued SFAS No. 162, which identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). The current GAAP hierarchy, as set forth in the American Institute of Certified Public Accountants (AICPA) Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles, has been criticized because (1) it is directed to the auditor rather than the entity, (2) it is complex, and (3) it ranks FASB Statements of Financial Accounting Concepts, which are subject to the same level of due process as FASB Statements of Financial Accounting Standards, below industry practices that are widely recognized as generally accepted but that are not subject to due process. The Board believes that the GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. Accordingly, the Board concluded that the GAAP hierarchy should reside in the accounting literature established by the FASB and is issuing this Statement to achieve that result. This Statement is effective 60 days (expected to be July 1, 2009) following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.
	•		Staff Position (FSP) FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments “(“FSP FAS 107-1 and APB 28-1 “). In April 2009, the FASB issued FASB Staff Position (FSP) FAS 107-1 and APB 28-1 which amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. Fair value information disclosed in the notes shall be presented together with the related carrying amount in a form that makes it clear whether the fair value and carrying amount represent assets or liabilities and how the carrying amount relates to what is reported in the

statement of financial position. An entity also shall disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments and shall describe changes in method(s) and significant assumptions, if any, during the period. This FSP shall be effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity may early adopt this FSP only if it also elects to early adopt FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, and FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments . This FSP does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, this FSP requires comparative disclosures only for periods ending after initial adoption.

•

Staff Position (FSP) FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2 and 124-2”). In April 2009, the FASB issued FASB Staff Position (FSP) FAS 115-2 and FAS 124-2 amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The FSP shall be effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. Earlier adoption for periods ending before March 15, 2009, is not permitted. If an entity elects to adopt early either FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly , or FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments , the entity also is required to adopt early this FSP. Additionally, if an entity elects to adopt early this FSP, it is required to adopt FSP FAS 157-4. This FSP does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, this FSP requires comparative disclosures only for periods ending after initial adoption.

•

Staff Position (FSP) FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”). In April 2009, the FASB issued FASB Staff Position (FSP) FAS 157-4 which provides additional guidance for estimating fair value in accordance with FASB Statement No. 157, Fair Value Measurements , when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. This FSP amends Statement 157 to require that a reporting entity disclose in interim and annual periods the inputs and valuation technique(s) used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period. Also, define major category for equity securities and debt securities based on the nature and risks of the securities. This FSP shall be effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. Earlier adoption for periods ending before March 15, 2009, is not permitted. If a reporting entity elects to adopt early either FSP FAS 115-2 and FAS 124-2 or FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments , the reporting entity also is required to adopt early this FSP. Additionally, if the reporting entity elects to adopt early this FSP, FSP FAS 115-2 and FAS 124-2 also must be adopted early. This FSP does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, this FSP requires comparative disclosures only for periods ending after initial adoption.

2. Investment Securities Available for Sale:

The amortized cost, gross unrealized gains and losses, fair value and weighted average yield of investment securities available for sale by contractual maturity are as follows:

		March 31, 2009
						Gross				Gross								Weighted
		Amortized				Unrealized				Unrealized				Fair				Average
		Cost				Gains				Losses				Value				Yield
		(Dollars in thousands)
Treasury and agencies of the United States Government:
Within one year		$	157,200			$	817			$	—			$	158,017				1.78	%
After one year to five years			5,656				216				—				5,872				3.99	%
			162,856				1,033				—				163,889				1.86	%
Commonwealth of Puerto Rico and its subdivisions:
Within one year			1,460				—				3				1,457				4.23	%
After one year to five years			130,200				671				247				130,624				5.22	%
After five years to ten years			9,542				28				319				9,251				5.15	%
Over ten years			4,505				3				5				4,503				5.55	%
			145,707				702				574				145,835				5.21	%
Mortgage-backed securities:
Over ten years			13,672				194				—				13,866				5.63	%
Foreign securities:
Within one year			50				—				—				50				4.65	%
		$	322,285			$	1,929			$	574			$	323,640				3.53	%

		December 31, 2008
						Gross				Gross								Weighted
		Amortized				Unrealized				Unrealized				Fair				Average
		Cost				Gains				Losses				Value				Yield
		(Dollars in thousands)
Treasury and agencies of the United States Government:
Within one year		$	164,844			$	1,164			$	1			$	166,007				2.30	%
After one year to five years			5,658				251				—				5,909				3.99	%
			170,502				1,415				1				171,916				2.36	%
Commonwealth of Puerto Rico and its subdivisions:
Within one year			1,460				—				6				1,454				4.23	%
After one year to five years			133,185				347				384				133,148				5.23	%
After five years to ten years			9,545				29				95				9,479				5.18	%
Over ten years			4,505				33				3				4,535				5.55	%
			148,695				409				488				148,616				5.22	%
Mortgage-backed securities:
After five years to ten years			193,630				2,258				73				195,815				4.39	%
Over ten years			282,235				3,525				45				285,715				5.41	%
			475,865				5,783				118				481,530				4.99	%
Foreign securities:
Within one year			50				—				—				50				4.65	%
		$	795,112			$	7,607			$	607			$	802,112				4.47	%

          The duration of long-term (over one year) investment securities in the available for sale portfolio is approximately 1.0 years at March 31, 2009, comprised of approximately 0.8 years for treasuries and agencies of the United States Government, 1.2 years for instruments from the Commonwealth of Puerto Rico and its subdivisions, 2.1 years for mortgage backed securities and 0.5 year for all other securities.

          The number of positions, fair value and unrealized losses at March 31, 2009 and December 31, 2008, of investment securities available for sale that have been in a continuous unrealized loss position for less than twelve months and for twelve months or more, are as follows:

March 31, 2009

Less than 12 months

12 months or more

Total

Number

Number

Number

of

Fair

Unrealized

of

Fair

Unrealized

of

Fair

Unrealized

Positions

Value

Losses

Positions

Value

Losses

Positions

Value

Losses

Commonwealth of Puerto Rico and its subdivisions

4

$

6,509

$

319

11

$

9,883

$

255

15

$

16,392

$

574

		December 31, 2008
		Less than 12 months												12 months or more												Total
		Number												Number												Number
		of				Fair				Unrealized				of				Fair				Unrealized				of				Fair				Unrealized
		Positions				Value				Losses				Positions				Value				Losses				Positions				Value				Losses
		(Dollars in thousands)
Treasury and agencies of the United States Government			1			$	30,000			$	1				—			$	—			$	—				1			$	30,000			$	1
Commonwealth of Puerto Rico and its subdivisions			1				705				72				14				19,338				416				15				20,043				488
Mortgage-backed securities			—				—				—				4				33,091				118				4				33,091				118
			2			$	30,705			$	73				18			$	52,429			$	534				20			$	83,134			$	607

          The Corporation evaluates its investment securities for other-than-temporary impairment on a quarterly basis or earlier if other factors indicative of potential impairment exist. An impairment charge in the consolidated statements of operations is recognized when the decline in the fair value of the securities below their cost basis is judged to be other-than-temporary. The Corporation considers various factors in determining whether it should recognize an impairment charge, including, but not limited to the length of time and extent to which the fair value has been less than its cost basis, expectation of recoverability of its original investment in the securities and the Corporation’s intent and ability to hold the securities for a period of time sufficient to allow for any forecasted recovery of fair value up to (or beyond) the cost of the investment.

          As of March 31, 2009 and December 31, 2008, management concluded that there was no other-than-temporary impairment in its investment securities portfolio. The unrealized losses in the Corporation’s investments in U.S. and P.R. Government agencies and subdivisions were caused by changes in market interest rates. All U.S. and P.R. Government agencies securities are investment grade, as rated by major rating agencies. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the face value of the investment. Since the Corporation has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Corporation does not consider these investments to be other-than-temporarily impaired at March 31, 2009 and December 31, 2008. The unrealized losses in the Corporation’s investment in mortgage-backed securities were also caused by changes in market interest rates. The Corporation purchased these investments at a discount relative to their face amount, and the contractual cash flows of these investments are guaranteed by an agency of the U.S. government or by other government-sponsored corporations. Accordingly, it is expected that the securities will be settled at a price not less than par value of the investment. The decline in market value is attributable to changes in interest rates and not credit quality and since the Corporation has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Corporation does not consider these investments to be other-than-temporarily impaired at March 31, 2009 and December 31, 2008.

          Contractual maturities on certain securities, including mortgage-backed securities, could differ from actual maturities since certain issuers may have the right to call or prepay these securities.

          The weighted average yield on investment securities available for sale is based on amortized cost, therefore it does not give effect to changes in fair value.

3. Assets Pledged:

          At March 31, 2009 and December 31, 2008, investment securities and loans were pledged to secure deposits of public funds and Federal Home Loan Bank advances. The classification and carrying amount of pledged assets, which the secured parties are not permitted to sell or repledge as of March 31, and December 31 were as follows:

		March 31, 2009				December 31, 2008
		(Dollars in thousands)
Investment securities available for sale		$	221,507			$	227,658
Other investment securities			43,650				53,325
Loans			2,470,286				2,511,098
		$	2,735,443			$	2,792,081

          Pledged securities that the creditor has the right or contract to repledge, are presented separately on the consolidated balance sheets. At December 31, 2008, investment securities with a carrying value of approximately $408,650,000 were pledged to securities sold under agreements to repurchase.

4. Loans:

          The Corporation’s loan portfolio consists of the following:

		March 31, 2009				December 31, 2008
		(Dollars in thousands)
Commercial and industrial		$	2,072,257			$	2,165,613
Consumer			530,426				565,833
Consumer finance			936,795				996,919
Leasing			56,237				64,065
Construction			94,809				194,596
Mortgage			2,512,428				2,553,328
			6,202,952				6,540,354
Unearned income and deferred fees/costs:
Commercial, industrial and others			140				(290	)
Consumer finance			(379,497	)			(418,676	)
Allowance for loan losses			(196,510	)			(191,889	)
Loans, net		$	5,627,085			$	5,929,499

          During the quarter ended March 31, 2009, the Corporation sold certain loans including some classified as impaired to an affiliate for $92.8 million in cash. These loans had a net book value of $92.8 million comprised of an outstanding principal balance of $95.8 million and a specific valuation allowance of $3.0 million. The type of loans sold, at net book value, was $65.6 million in construction loans and $27.2 million in commercial loans. No gain or loss was recognized on this transaction.

5. Allowance for Loan Losses:

          Changes in the allowance for loan losses are summarized as follows:

		For the three months ended
		March 31, 2009				March 31, 2008
		(Dollars in thousands)
Balance at beginning of period		$	191,889			$	166,952
Provision for loan losses			41,100				39,575
			232,989				206,527
Losses charged to the allowance:
Commercial and industrial			4,727				2,344
Construction			2,254				—
Mortgage			1,380				66
Consumer			13,067				9,537
Consumer finance			16,056				15,917
Leasing			313				488
			37,797				28,352
Recoveries:
Commercial and industrial			470				156
Construction			20				—
Consumer			333				345
Consumer finance			414				376
Leasing			81				98
			1,318				975
Net loans charged-off			36,479				27,377
Balance at end of period		$	196,510			$	179,150

6. Goodwill and Other Intangible Assets:

Goodwill

          The Corporation assigned goodwill to reporting units at the time of acquisition. Goodwill was allocated to the Commercial Banking segment, the Wealth Management segment and the Consumer Finance segment as follows:

		March 31, 2009				December 31, 2008
		(Dollars in thousands)
Commercial Banking		$	10,537			$	10,537
Wealth Management			24,254				24,254
Consumer Finance			86,691				86,691
		$	121,482			$	121,482

          Goodwill assigned to the Commercial Banking segment is related to the acquisition of Banco Central Hispano Puerto Rico in 1996, the goodwill assigned to the Wealth Management segment is related to the acquisition of Merrill Lynch’s retail brokerage business in Puerto Rico by Santander Securities Corporation in 2000 and the goodwill assigned to the Consumer Finance segment is related to the acquisition of Island Finance in 2006.

Other Intangible Assets

          Other intangible assets at March 31, 2009 and December 31, 2008 were as follows:

		March 31, 2009				December 31, 2008
		(Dollars in thousands)
Commercial Banking — Mortgage-servicing rights		$	10,229			$	10,175
Wealth Management — Advisory-servicing rights			1,190				1,267
Consumer Finance:
Trade name			18,300				18,300
Non-compete agreements			—				100
		$	29,719			$	29,842

          Mortgage-servicing rights arise from the right to service mortgages sold and have an estimated useful life of eight years. The advisory-servicing rights are related to the Corporation’s subsidiary acquisition of the right to serve as the investment advisor for the First Puerto Rico Tax-Exempt Fund, Inc. acquired in 2002 and for First Puerto Rico Growth and Income Fund Inc. and First Puerto Rico Daily Liquidity Fund Inc. acquired in December 2006. This intangible asset is being amortized over a 10-year estimated useful life. Trade name is related to the acquisition of Island Finance and has an indefinite useful life and is therefore not being amortized but is tested for impairment at least annually. Non-compete agreements were intangible assets related to the acquisition of Island Finance. Non-compete agreements have been fully amortized as of March 31, 2009.

          The following table reflects the components of other intangible assets at March 31, 2009 and December 31, 2008:

		March 31, 2009
			Gross			Accumulated				Carrying
		Amount				Amortization				Amount
		(Dollars in thousands)
Commercial Banking — Mortgage-servicing rights		$	19,033			$	8,804			$	10,229
Wealth Management — Advisory-servicing rights			3,050				1,860				1,190
Consumer Finance:
Trade name			18,300				—				18,300
		$	40,383			$	10,664			$	29,719

		December 31, 2008
			Gross			Accumulated				Carrying
		Amount				Amortization				Amount
		(Dollars in thousands)
Commercial Banking — Mortgage-servicing rights		$	18,382			$	8,207			$	10,175
Wealth Management — Advisory-servicing rights			3,050				1,783				1,267
Consumer Finance:
Trade name			18,300				—				18,300
Non-compete agreements			3,356				3,256				100
		$	43,088			$	13,246			$	29,842

          Amortization of the other intangibles assets for the three month period ended March 31, 2009 and year ended December 31, 2008 was approximately $0.8 million and $3.1 million, respectively.

7. Other Assets:

          The Corporation’s other assets consist of the following:

		March 31, 2009				December 31, 2008
		(Dollars in thousands)
Deferred tax assets, net		$	63,365			$	56,542
Accounts receivable, net of allowance for claim receivable of $25.1 million			43,071				40,581
Repossesed assets, net			28,410				22,306
Software, net			6,512				7,295
Prepaid expenses			11,195				13,835
Income tax credits			20,205				19,645
Customers’ liabilities on acceptances			198				610
Derivative assets			171,457				197,192
Confirming advances			77,462				122,540
Other			14,916				5,337
		$	436,791			$	485,883

          Amortization of software assets for the three month period ended March 31, 2009 and year ended December 31, 2008 was approximately $0.9 million and $4.8 million, respectively.

          The Corporation had counterparty exposure to Lehman Brothers, Inc. (“LBI”) in connection with the sale of securities sold under agreements to repurchase amounting to $200.2 million at September 19, 2008 under a Master Repurchase Agreement. LBI was placed in a Securities Investor Protection Corporation (“SIPC”) liquidation proceeding on September 19, 2008. The filing of the SIPC liquidation proceeding was an event of default under the terms of the Master Repurchase Agreement, which resulted in the acceleration of repurchase dates under the Master Repurchase Agreement to September 19, 2008. This action resulted in a reduction in the Corporation’s total assets of $225.3 million and a reduction in its total liabilities of $200.2 million in 2008. As soon as claims procedures have been established in the LBI liquidation proceeding, the Corporation intends to file a claim for the amount $25.1 million, which is the amount it is owed by LBI as a result of the acceleration of repurchase date and the exercise by the Corporation of its rights under the Master Repurchase Agreement, plus incidental expenses and damages. The Corporation has recognized a claim receivable from LBI for $25.1 million and has established a valuation allowance for the same amount since management, in consultation with legal counsel, believes that based on current information and events, it is probable that the Corporation will be unable to collect all amounts due. The tax effect related to the recognition of this valuation allowance was a deferred tax benefit of $9.8 million.

          The Law 197 of Puerto Rico (“Law 197”) of 2007 granted certain credits to home buyers on the purchase of certain qualified new or existing homes. The incentives was as follows: (a) for a newly constructed home that will constitute the individuals principal residence, a credit equal to 20% of the sales price or $25,000, whichever is lower; (b) for newly constructed homes that will not constitute the individuals principal residence, a credit of 10% of the sales price or $15,000, whichever is lower; and (c) for existing homes a credit of 10% of the sales price or $10,000, whichever is lower. The credits were generally granted to home buyers by the financial institutions financing the home acquisition and later claimed on the financial institution’s tax return as a tax credit. Credits available under Law 197 needed to be certified by the Puerto Rico Secretary of Treasury and the total amount of credits available under the law was $220,000,000, which was depleted in December of 2008.

          The tax credits do not expire and may be used against income taxes, including estimated income taxes, for tax years commencing after December 31, 2007 in three installments, subject to certain limitations. In addition, the tax credits may be ceded, sold or otherwise transferred to any other person; and any tax credit not used in a given tax year, may be claimed as a refund but only for taxable years commenced after December 31, 2010. The Corporation had $20.2 million unused income tax credits certified by the Secretary at March 31, 2009.

8. Other Borrowings:

          Following are summaries of borrowings as of and for the periods indicated:

		March 31, 2009
		Federal Funds				Securities Sold				Commercial
		Purchased and				Under Agreements				Paper
		Other Borrowings				to Repurchase				Issued
		(Dollars in thousands)
Amount outstanding at period-end		$	890			$	—			$	34,084
Average indebtedness outstanding during the period		$	1,669			$	311,667			$	52,959
Maximum amount outstanding during the period		$	2,040			$	375,000			$	59,100
Average interest rate for the period			0.19	%			4.42	%			0.98	%
Average interest rate at period-end			0.16	%			—				1.09	%

		December 31, 2008
		Federal Funds				Securities Sold				Commercial
		Purchased and				Under Agreements				Paper
		Other Borrowings				to Repurchase				Issued
		(Dollars in thousands)
Amount outstanding at year-end		$	2,040			$	375,000			$	50,985
Average indebtedness outstanding during the year		$	190,097			$	523,873			$	209,480
Maximum amount outstanding during the year		$	751,000			$	625,006			$	625,000
Average interest rate for the year			4.21	%			4.87	%			3.60	%
Average interest rate at year-end			0.09	%			4.35	%			0.75	%

Federal funds purchased and other borrowings, securities sold under agreements to repurchase and commercial paper issued mature as follows:

		March 31, 2009				December 31, 2008
		(In thousands)
Federal funds purchased and other borrowings:
Over ninety days		$	890			$	2,040
Securities sold under agreements to repurchase:
Thirty to ninety days		$	—			$	75,000
Over ninety days			—				300,000
Total		$	—			$	375,000
Commercial paper issued:
Within thirty days		$	34,084			$	50,985

          As of March 31, 2009 the weighted average maturity of Federal Funds purchased and other borrowings over ninety days was 9.02 months.

          During the first quarter ended March 31, 2009, the Corporation cancelled $300 million of securities sold under agreement to repurchase. As a result of this early cancellation, the Corporation paid $9.6 million of penalty and recognized as a loss included in other income in the consolidated statements of operations.

     As of December 31, 2008, securities sold under agreements to repurchase (classified by counterparty) were as follows:

December 31, 2008

Weighted-

Fair Value of

Average

Balance of

Underlying

Maturity

Borrowings

Securities

in Months

(Dollars in thousands)

JP Morgan Chase Bank, N.A.

$

375,000

$

408,650

10.98

     The following investment securities were sold under agreements to repurchase as of December 31, 2008:

December 31, 2008

Carrying

Fair

Weighted-

Weighted-

Value of

Value of

Average

Average

Underlying

Balance of

Underlying

Interest Rate

Interest Rate

Underlying Securities

Securities

Borrowings

Securities

Securities

Borrowings

(Dollars in thousands)

Mortgage-backed securities

$

408,650

$

375,000

$

408,650

5.12

%

4.35

%